Regardless of how you feel about the Internal Revenue Service — it’s dysfunctional, it’s underfunded, or both — there’s a basic point that’s hard to refute: The current system to ferret out wrongdoers is terrible. And in a move that will only make it worse, House Republicans voted Monday to block new funding allocated for the agency by the last Congress.
Consider that the tax gap, or the difference between what taxpayers owe and what they actually pay, averaged $496 billion from 2014 through 2016 (the agency’s most recent estimates). Even after audits and enforcement actions, the agency collected just 14% of total taxes owed but not paid, or $68 billion.
Part of the problem is that audits are barely happening for the people who owe the most. The agency just doesn’t have the money to conduct such audits, thanks to funding cuts over the last decade. For individual taxpayers making at least $1 million, the audit rate dropped from 8.4% in 2010 to just 2.4% in 2019. Almost all of the biggest corporations were subject to audits in 2010 compared with just half in 2019.
And when it does conduct audits, the IRS often picks the wrong targets or finds itself outmaneuvered by sophisticated attorneys. Almost 40% of audits of large corporations resulted in “no change” in 2019, meaning whatever had been reported on tax returns was substantiated, according to Congressional testimony by Janet Holtzblatt, a senior fellow at the Urban Brookings Tax Policy Center. About 38% of individual taxpayers with income in excess of $1 million either had “no change” or received a refund. That means the money spent on the audits didn’t recoup any revenue.
Even worse, audits don’t make much of a difference when it comes to future behavior. Studies have found some taxpayers become more brazen tax cheats after being audited because they think being targeted once reduces their chances of being investigated again.